Question

(Table: Christie' and Sotheby's) Each cell of this table presents the revenues can the auction houses, Christie's and Sotheby's. Revenues are based on the type or commission each firm charges its clients, as well as what commission the other Christie's revenues are listed first in each cell, then Sotheby's. Categy of chan the respection low price. This If both firms cooperate and act like a cartel: Sotheby's will charge a price and Christie's will charge a thing Chich/low price. This results in a pas both firms that is greater than the respective navoff whenever both firms cxcom dominant strategy of charging a Chiable price This outcome of the prison dilemma helps us to illustrate that the pursuit of self-interest by both parties outcome that is better worse for both firms than when the two firms cooperate. (4 pts.) Sotheby's Strategies High Commission Low Commission Christie's High Commission S4 million $4 million $2 million, 50 Strategies Low Commission m on $2 min $3 million, $3 million 6. (Table: Three-Country Oil Production) Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. If the countries create a cartel and agree to mimic monopoly-like behavior, the level of output each firm would produce is units. Now. suppose that country A breaks the agreement by producing an additional 200 units of output which results in an increase of profits of dollars for firm A while profits for country B and C both fall by dollars. (3 pts.) Total Market Output Market Price 90 800 8 0 11. 00070 1,400 1.600 1,800 50 40 30 7. The above example of cheating within cartels demonstrates the instability of cartels and the reasoning why they often break down. After the cartel agreement is reached and market supply has been restricted resulting in higher prices, it is in the incentive of each firm to _(maintain/decrease/increase) their production levels as the firm that cheats on the cartel agreement receives (none/some/all) of the gains of increased production while the losses from a decreasing price level (fall fully on/are shared by) the two non-cheating countries). (3 pts.)

Answer 1

5) sothehys will charge a high price and Christis will charge a high price. This results ina payoff for both firms greater than the repective payoff whenever both firms exercise their dominant strategy of charging a lowprice. This outcome of the prisoner's dilemma helps us to illustrate that the pursuit of self interested by both parties leads to an outcome that is worse fir both firms than when the two firms.

6) 600 units

  90 dollars

  30 dollars

7) maintain

  All

  Are shared by